Professional Documents
Culture Documents
Evaluating
Financial Position
CHAPTER 2
Measuring and Evaluating Financial Position
Balance Sheet…
1
The Balance Sheet portrays the enterprise
by arranging its lists of accounts so that the
left side lists the total resources (“assets”)
and the right side shows how the assets
were financed.
•Non-current •Non-current
EQUITY
•Contributed Capital
•Retained Earnings
Components-- Assets
Components
Asset:
“A resource available to do business in the future, represented by
an ownership of or right to expected future economic benefits.”
Current Asset:
“Cash and other assets such as temporary investments, inventory,
receivables, and current prepayments that are realizable or will be
consumed within the normal operating cycle of an enterprise
(usually one year).”
Non-current Asset:
“Assets expected to bring benefit for more than one fiscal year.”
•Non-current •Non-current
EQUITY
•Contributed Capital
•Retained Earnings
2
Components-- Liabilities
Components
Liability:
“A debt or obligation, legally existing or estimated via accrual
accounting techniques, of the enterprise to another party
(creditor) arising from a past transaction.”
Current Liability:
“Debts or estimated claims on the resources of a firm that are
expected to be paid within the normal operating cycle of an
enterprise (usually one year).”
Non-current Liability:
“Liabilities expected to be repaid or otherwise removed more than
one year in the future. ”
•Non-current •Non-current
EQUITY
•Contributed Capital
•Retained Earnings
Components-- Equity
Components
Equity:
“The net assets or residual interest of an owner or shareholder
(Assets-Liabilities=Equity)”
Contributed Capital:
“Direct investment(s) of the owner(s) in the business”
Retained Earnings:
“Earnings not yet distributed to owners: the sum of net incomes
earned over the life of a company, less distributions (dividends
declared) to owners.”
3
ASSETS = LIABILITIES + EQUITY
ASSETS LIABILITIES
EQUITY
Historical basis
As at a particular date
Signed on behalf of the Board of Directors
History informed by estimates of future
Many supplementary notes
Comparative to at least prior year
Equity is the “book value” of the whole company:
Equity = Assets - Liabilities
4
Sound and Light Corporation
Balance Sheet as at April 30, 2001
in Thousands of Dollars
Vertical style Assets
Current assets $245
Non-current assets 250
TOTAL $495
TOTAL $495
5
Let’s do an example of Balance Sheet
transactions using XYZ Inc.
Inc.
This morning, XYZ had the following amounts on its Balance Sheet:
ASSETS = LIABILITIES + EQUITY
CA + NCA = CL + NCL + SC + RE
$50 + $210 = $30 + $80 + $60 + $90
CA $50 CL $30
NCL $80
NCA $210 SC $60
RE $90
Total $260 Total $260
EVENT #1:
New Shares were issued for $35 cash.
RESULT?
Left Side : CA (cash) increases by $35
Right Side : SC (Share Capital) increases by $35
EVENT #2:
The Share proceeds were used to reduce long-
term debt.
RESULT?
Left Side : CA (cash) decreases by $35
Right Side : NCL decreases by $35
6
ASSETS = LIABILITIES + EQUITY
CA + NCA = CL + NCL + SC + RE
$50 + $210 = $30 + $80 + $60 + $90
+35 +35
-35 -35
-15 +55 +40
EVENT #3:
A new delivery truck costing $55 was bought by
paying $15 down and promising to pay the rest in
three years.
RESULT?
Left Side : NCA increase by $55
CA (cash) decreases by $15
Right Side : NCL increases by $40
EVENT #4:
A demand loan of $20 was borrowed from the bank.
RESULT?
Left Side : CA (cash) increases by $20
Right Side : CL increases by $20
$320 = $320
7
New totals for XYZ Inc.
Inc.
ASSETS = LIABILITIES + EQUITY
CA + NCA = CL + NCL + SC + RE
$55 + $265 = $50 + $85 + $95 + $90
CA $55 CL $50
NCL $85
NCA $265 SC $95
RE $90
Total $320 Total $320
8
As a Result of Double Entry Accounting:
9
RESOURCES (LEFT) SOURCES (RIGHT)
Positive Items (debits)
10
RESOURCES (LEFT) SOURCES (RIGHT)
Positive Items (debits) Positive Items (credits)
11
Journal Entries and Accounts
DR Cash 1000
CR Bank Loan 1000
Using T- accounts we get:
CASH Bank Loan
DR CR DR CR
1000 1000
Entries:
DR Cash 1000
CR Bank Loan 1000
12
Accounts are summaries of all the entries
Let’s use a cash example:
CASH
1000
500
Entries:
DR Cash 500
CR Share Capital 500
Entries:
DR Loan Payable 400
CR Cash 400
Entries:
DR Rent 250
CR Cash 250
13
Accounts are summaries of all the entries
CASH
1000 400
500 250
850
Calico Inc. had the following account balances at June 30, 2001.
Place each account in the appropriate location in the balance sheet
and show that the balance sheet balances.
$ $
Land 100,000 Accounts Receivable 43,000
Cash on Hand 5,000 Retained Earnings 223,000
Unsold Inventory 62,000 Buildings & Fixtures 193,000
Accum. Amortization 41,000 Cash in Bank 21,000
Accounts Payable 45,000 Demand Bank Loan 30,000
Share Capital 50,000 Mortgage Payable 35,000
14
Calico Inc., Balance Sheet as at June 30, 2001
(Assets)
Assets
Current assets:
Cash on hand and in bank $26,000
Accounts receivable 43,000
Inventory 62,000
$131,000
Non-current assets:
Land $100,000
Building and fixtures 193,000
Less: Accumulated amortization (41,000)
$252,000
TOTAL $383,000
Shareholders' equity:
Share capital $50,000
Retained earnings 223,000
$273,000
TOTAL $383,000
CappuMania Inc.
Balance Sheet as at March 31, 2001
15
CappuMania Inc.
Trial Balance (March 31, 2001)
Journal Entries-
Entries- CappuMania
Journal Entries-
Entries- CappuMania
16
CappuMania Inc.
Trial Balance (April 1, 2001)
CappuMania Inc.
Balance Sheet as at April 1, 2001
Increase Decrease
Assets Debit Credit
Liabilities Credit Debit
Equity Credit Debit
17
Transaction Recording and Journal Entries
DR Cash 95,000
CR Common Shares 95,000
RECORDING TRANSACTIONS
ASSETS = LIABILITIES + EQUITY
CASH COMMON SHARES
95,000 95,000
Increase/
Decrease/NC Which Account?
INCREASE LAND
ASSETS DECREASE CASH
LIABILITIES NO CHANGE
EQUITY NO CHANGE
DR Land 60,000
CR Cash 60,000
18
RECORDING TRANSACTIONS
ASSETS = LIABILITIES + EQUITY
CASH COMMON SHARES
95,000 60,000 95,000
LAND
60,000
Dr Cr
Cash 35,000
Land 60,000
Common Shares 95,000
95,000 95,000
19
RECORDING TRANSACTIONS
ASSETS = LIABILITIES + EQUITY
CASH ACCOUNTS COMMON SHARES
95,000 60,000 PAYABLE
95,000
600
LAND
60,000
OFFICE
SUPPLIES
600
Increase/
Decrease/NC Which Account?
INCREASE EQUIPMENT
ASSETS DECREASE CASH
ACCOUNTS
LIABILITIES INCREASE
PAYABLE
EQUITY NO CHANGE
DR Equipment 40,000
CR Cash 20,000
CR Accounts Payable 20,000
RECORDING TRANSACTIONS
ASSETS = LIABILITIES + EQUITY
CASH ACCOUNTS COMMON SHARES
95,000 60,000 PAYABLE
95,000
20,000 600
20,000
LAND
60,000
OFFICE
SUPPLIES EQUIPMENT
600 40,000
20
ASSETS = LIABILITIES + EQUITY
CASH ACCOUNTS COMMON SHARES
95,000 60,000 PAYABLE
95,000
20,000 600
20,000 95,000
15,000
LAND 20,600
60,000
60,000
OFFICE
SUPPLIES EQUIPMENT
600 40,000
600 40,000
Movie Inc.
BALANCE SHEET
AS AT JULY 1, 2001
Financing an Organization
21
Business Financing
The balance sheet’s right side lists the sources of assets (liabilities
& owners’ equity). Here is a list of a few of the main sources.
Current liabilities:
Demand loans from the bank
Financing provided by suppliers and trade creditors (buy now/pay
later)
Wages earned but not yet paid to employees
Non-current liabilities:
Mortgages, bonded debt, debentures, and other debts extending
over several years
Business Financing
Proprietorship
•Owned by a single individual.
•A sole proprietorship is not a separate legal entity, therefore
the owner has unlimited liability for business debts.
•Direct contributions and retained earnings are lumped
together in the equity section of the balance sheet. This
equity is known as owner’s capital.
Example of Equity Section:
Owner’s equity
Owner’s capital $XXXX
22
Partnership
Partnership
Corporation
23
Corporation
DIRECT CONTRIBUTIONS:
• People become owners by purchasing shares.
• Shares entitle a person to voting rights or other
powers.
• Share capital is only the amount received by the
corporation the first time a share was sold.
Classes of shares include:
•Common Shares
•Preferred Shares
Corporation
INDIRECT CONTRIBUTIONS (Retained Earnings):
•Earnings belong to the corporation.
• Retained Earnings equal the past earnings minus the
past dividends.
Corporation
Example of Equity Section:
Shareholders’ equity
Share capital:
Authorized (narrative describing all the classes of
shares authorized)
Issued capital received:
Class A shares (for example) $XXXX
Class B shares (for example) XXXX
Total issued capital $XXXX
Retained earnings $XXXX
Total shareholders’ equity $XXXX
24
Corporate Groups
Assets
Cash and short-term securities $101,027
Loans (net of allowance for credit losses) 87,485
Other assets 25,905
Total assets $214,417
Liabilities
Deposits $140,386
Other liabilities 62,498
Total liabilities 202,884
Shareholders' Equity
Capital stock 2,839
Retained earnings 8,694
11,533
Total liabilities and shareholders' equity $214,417
25